We initiate with an OVERWEIGHT on Singapore Hospitality REITs. We prefer CDL Hospitality Trusts [BUY, FV: S$2.04] to Ascott Residence Trust [BUY, FV: S$1.23].
More organic growth for CDLHT
The buoyant Singapore hotel industry has been the key driver for CDLHT, whose six Singapore hotels accounted for 77% of its FY11 gross revenue. In 1Q12, CDLHT’s Singapore hotels registered an average RevPAR higher than all previous 1Qs and that quarter also marked the third consecutive one, starting from 3Q11, to set RevPAR records. We estimate that for 2012-2015 the demand for hotel rooms in Singapore will grow at 6.4% p.a., outstripping the hotel rooms supply growth, which we project will be 3.7% p.a. over the same period. We prefer CDLHT’s positioning (Upscale/Mid-tier) relative to others more clearly situated in the Mid-tier/Economy categories, as we see higher growth in hotel rooms supply for these latter tiers at 5.3%, versus 3.0% for the Luxury/Upscale categories.
ART’s master leases and management contracts
ART’s portfolio is diversified with properties in 12 countries. As of 31 Mar, 78% of its assets were spread over
five countries (Singapore – 22.2%, France – 19.1%, UK – 15.9%, Japan – 12.9%, Vietnam – 8.0%). 40% of ART’s assets are in Europe. Despite the economic problems there, income from ART’s European assets is reasonably resilient, underpinned by master leases arrangements for the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.
Lower gearing for CDLHT
Apart from its stronger potential growth profile, we like CDLHT because of its low gearing of 25.6%, versus ART’s 39.2% (enlarged portfolio excluding new Cairnhill serviced residence), which gives CDLHT more flexibility to acquire yield-accretive properties. We expect that CDLHT may make an acquisition within the next one year, either in Singapore or potentially higher yielding markets abroad. There are currently two hospitality REITs listed in Singapore – CDL Hospitality Trusts (CDLHT) and Ascott Residence Trust (ART). CDLHT primarily owns hotels in Singapore, Australia and New Zealand while ART owns serviced residences in 12 countries in Asia Pacific and Europe.
Stronger financial position.
We like CDLHT because of its low gearing of 25.6%, versus ART’s 39.2% (enlarged portfolio excluding new Cairnhill serviced residence), which gives CDLHT more flexibility to acquire yield-accretive properties. We expect that CDLHT may make an acquisition within the next one year, either in Singapore or potentially higher yielding markets abroad.
ART’s portfolio is resilient… ART’s has properties in 12 countries. As of 31 Mar, 78% of its assets were spread over 5 countries (Singapore – 22.2%, France – 19.1%, UK – 15.9%, Japan – 12.9%, Vietnam – 8.0%). 40% of its assets are in Europe. Despite the economic problems in there, income from ART’s European assets would be underpinned by master leases arrangements for the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.
…but CDLHT has a better growth profile. On the whole, we believe that there greater opportunity for organic growth in net property income for CDLHT’s portfolio as opposed to ART’s. The buoyant Singapore hotel industry has been the key driver for CDLHT, whose six Singapore hotels accounted for 77% of its FY11 gross revenue. In 1Q12, CDLHT’s Singapore hotels registered an average RevPAR higher than all previous 1Qs and that quarter also marked the third consecutive one, starting from 3Q11, to set a RevPAR record. In addition, CDLHT’s five hotels located in Perth and Brisbane, which accounted for 13% of FY11 gross revenue, have been doing well with the strong natural resources sector in Australia driving hotel demand.
CDLHT’s Singapore hotels have good positioning in the buoyant local hotel industry. We estimate that for 2012-2015 the demand for hotel rooms in Singapore will grow at 6.4% p.a., outstripping hotelrooms supply growth, which we project will be 3.7% p.a. over the same period. The STB does not disclose exactly which hotels are listed under each of the four categories it uses – Luxury, Upscale, Mid-tier and Economy. CDLHT’s Singapore portfolio’s RevPAR numbers tend to fluctuate between the STB figures for Upscale and Mid-tier categories. We prefer CDLHT’s positioning relative to others more clearly situated in the Mid-tier/Economy categories, as we see higher growth in hotel rooms supply for these latter tiers at 5.3%, versus 3.0% for the Luxury/Upscale categories.
CDLHT will see higher rental income due to variable rental lease structure. CDLHT’s lease structure allows its gross revenue to increase as the revenue and/or gross operating income of each hotel rises. For example, four of CDLHT’s Singapore hotels are under leases where the rent is equal to 20% of the hotel's revenue and 20% of hotel’s gross operating profit, with a fixed rent floor. For 1Q12, 60% of the rent from Singapore properties was due to variable rent.
We are now OVERWEIGHT on the Hospitality REITs subsector in Singapore. We prefer CDL Hospitality Trusts [BUY, FV: S$2.04] to Ascott Residence Trust [BUY, FV: S$1.23].
Estimating hotel room demand growth of 6.4% p.a for 2012-2015. We project that hotel room demand will grow slightly slower than 6.6% p.a. due to “leakage” in the translation of visitor numbers into hotel room nights because of the growing importance of the cruise business in the years ahead, following the recent opening of the Marina Bay Cruise Centre Singapore (MBCCS). Our understanding is that most cruise passengers will fly into Singapore, take a cruise, return to land and then fly off, i.e. Fly-Cruise-Fly, without staying in hotels.
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